When it comes to business, it is highly important for investors to see the company’s financial standing as this directly reflects the market’s interest and acceptance of a company’s products and services. One of the most fundamental facts about businesses is that the operating performance of the firm shapes its financial structure. However, it is also true that the financial situation of the firm can also determine its operating performance.

Your business’s financial standing measures your company’s overall health. The process of determining the latter is called “business valuation.” It is often conducted to provide an accurate snapshot of your company’s financial performance to both current and potential investors. Your business valuation is of utmost importance to them as they are getting the company share in lieu of the money that they spent, or are going to spend, if ever they decide to invest.

Methods of Valuation:

Discounted Cash Flow:Discounted cash flow is used to find out the value of the company as of today based on the projections of all the cash that could be made available to investors in the future. It considers the principle of “time value of money” (i.e. cash in the future is worth less than available cash today).

Comparable Company Multiple:Comparable companies’ analysis involves the comparison of operating metrics and valuation multiples of comparable public companies with the same target market.

Precedent Transaction Multiple:It is a valuation method in which the price and valuation of similar companies in recent transaction is considered as an indicator of a company’s value. Precedent transaction analysis creates an estimate of what a share of stock might be worth in case of an acquisition.

Small or no revenues, operating losses:In case of startups in initial stage, revenues are small or non-existent for idea companies and the expenses often are associated with getting the business established, rather than generating revenues.

Many don’t survive:Many startups fail for a number of reasons such as lack of experience and funds, no clarity on business idea, legal barriers amongst others.

Multiple claims on equity:To protect their interests, preceding equity investors demand and get protection against this eventuality in the form of first claims on cash flows from operations and in liquidation and with control or veto rights, allowing them to have a say in the firm’s actions.

Investments are illiquid:Equity investments in young firms tend to be privately held and in non-standardized units. They are also much more illiquid than investments in publicly traded companies.

When it comes to business valuation, it is indeed true that startups face a number of challenges. The business is only starting, and the company’s financial standing might not be that established yet. However, with creativity, new ideas, and teamwork, the business will surely improve. There are many internal and external factors affecting business valuation. Also, notwithstanding of the valuation technique used, or the challenges faced, valuation mainly depends upon the demand and the value propositions that the company brings in for the society.

With creative startups in the market, being an angel investor is something of a trend. With a slump in real estate and a change in risk appetite, angels are looking beyond the traditional asset classes of real estate and public equities.

Becoming a clever angel though, is essentially different. Diving into early-stage investing has its pros and cons like other asset classes too. Investing in newborn companies is a risk. They are yet to prove themselves to the world, and you definitely cannot risk your money that easily.

Knowing that angel investing needs a smart and clear judgement, here are some crucial points that might help you decide to give it a stop or a go:

It’s definitely a risk. Anything that involves money is a risk. Keep in mind that you are about to invest in something that is yet to prove itself to the world. Just like a normal business venture, it may or may not end up well. On the other hand, it might become the next Facebook, too.

Illiquidity. Yes, aside from money, angel investing also presents the challenge of illiquidity. If you’re highly engaged in the stock market or real estate, then angel investing might be quite alarming for you. Once you decide to invest, your money might not come out until the end of your average hold (which in the U.S is about nine years, by the way).

Use your background and experiences to decide. Many of the world’s angel investors are business entrepreneurs who already went through the startup phase. If you are one of these people, you can use your background and other experiences to come up with the smartest decision in terms of angel investing. These can help you decide which companies to invest upon.

Get a pro to help you out. Of course you’d have to sign legal documents to seal the deal. Knowing full well will incredibly help, especially if it’s your first time to do it. You can also set up a few conditions to ensure a return of money. In this way, you’d still be able to get something just in case the startup fails.

With everything that’s necessary in backing up startups, one needs to be cautious while investing as an angel in startups. Just like any other business venture, half of your investments might not be able to make its way back to you, however, the hope is to get bumper returns from the select few The choice is always whether to hedge your risk and make multiple investments or carefully evaluate deals to choose the best one or two. With your money on the line, you definitely have to do your best to help your chosen companies bloom while safeguarding your interests at the same time. When you are able to do that, your investments might multiply ten folds more in the near future.